URSABLOG: Stimulating Forecasts
Earlier this week I rather unwisely got involved in an online discussion on The Athletic, an online sports journal, about the upcoming signings that Liverpool Football Club will have to make this summer to improve on this season’s less than stellar performance. I won’t bore you too much with the details, except to say that I disagreed with one or two comments that suggested that the only way was to throw money at the problem. I suggested that one mediocre season is not the end of the world and as long as progress is made – keeping with the ethos and identity of the club – that was better than selling out to a Gulf State fund who would invest huge sums of money to win at all costs at the expense of many of the things that makes Liverpool and their fans special.
It is a long time since I have been to Liverpool, let alone to Anfield Road to watch a live game, so why was I tempted to get into an online spat (I am afraid I was probably very pompous and dismissive). And even if I was still living there and going regularly to the matches, I could only ever have the fan’s view, not the insider’s view. I would not know the players, the staff, I would not attend training sessions and certainly not listen into management discussions about team selection, tactics and likely transfer targets. I follow my club via television, journalism and social media. I can have an opinion, and it may be – as I would like to think – reasonable, and reasonably wise. More than that it gives me some sense of belonging in a vague community, knowing whatever I do or say will have an infinitesimal effect on what will happen at the club.
So when I start writing about China and its effects on the dry bulk shipping market, I should remember that I have even less knowledge and perspective of what is going on there and what is likely to happen economically, politically, socially, whatever. At least I have the advantage when talking about Liverpool of having lived there for many years. Although I have visited China many times, it was always on business as a ship sale and purchase broker: I stayed in business hotels in Shanghai, Nanjing and Nantong and met shipbrokers, shipowners, bankers and people associated with the shipbuilding industry. I was fortunate to have that experience of course, but it was necessarily brief, shallow and narrow.
I am perplexed however when I read commentary and hear people speak with deep conviction that China will, indeed must, embark on a massive stimulus programme, and then flag up every monetary tweak the People’s Bank of China announces as evidence that more is to come, and will lead to a sustained boost to the dry bulk shipping market. For the record I don’t think it does and I don’t think that it will.
If you had read some of the headlines over the last couple of weeks you might have been forgiven if you had thought that China had just embarked on a massive stimulus programme. Closer examination reveals something a little more underwhelming: a drip feed of monetary measures designing to keep the plumbing of the financial system fluid.
The People’s Bank of China cut the seven-day reverse repo rate by ten basis points, to 1.9%, which is hardly seismic: the rate is used to manage short-term liquidity in the banking system, and as such it is a tweak to domestic credit liquidity, rather than turning the taps full on. Last week China’s six biggest state-run banks cut deposit rates, trying to get more money back into the economy by disincentivising savings. Encouraging, but hardly enough to go out and order a series of kamsarmaxes.
I can understand why people are looking for something that suggests China will boost their economy, after all it happened before (massively in 2009 in particular, but also before and since then in less significant amounts) so it could happen again. But this is comparing an old China with the current one, and the current one is completely different, and not only because it is led by President Xi Jinping.
Economic growth is not the sole political goal now, and in fact economic growth is now subservient to the overall political goal of common prosperity as defined by President Xi. The Communist Party of the People’s Republic of China has reasserted itself, and making money for its own sake is discouraged. Policy after policy in the period before and after last November’s Party Congress cementing Xi as paramount leader, enshrining Xi Jinping thought into the constitution – and not just to give Xi an unprecedented third term as president – should illustrate what he wants: a Chinese communist country, controlled by the Party.
The financial tools being used by the People’s Bank of China, and the Ministry of Finance are part of this control. Monetary policy – altering interest rates, increasing and decreasing money supply – creates the conditions for people to increase or decrease their spending. A fiscal stimulus is spending money, to build, make, create, give, invest in the material economy. There is no sign of any change in fiscal policy in China, no huge investments coming up.
There are large piles of savings accumulated by individuals ready to be invested and the state seems to have decided to use a carrot and stick approach to release these funds: increase the availability of credit and lower deposit rates. But this has been incremental and will probably remain so; I suspect the fear of losing control of the economy and letting loose atavistic animal spirits goes against all the paternal instincts of the current Politburo Standing Committee.
At the heart of all this is the ill health of the property market. The government remains wary of stepping in, having already said that homes are for living in not for speculation, and having drawn the red lines which contributed to the Chinese property market shuddering to a halt. The steps it has taken to stabilise the property market have been largely monetary and have had some effect. Property prices have become more affordable, but there is still little confidence that making downpayments on a new property will result in getting a finished property. People do not have the confidence in either the property developers or their financiers (or financiers in general following widespread banking fraud, particularly in smaller cities and rural areas). So developers continue to lack funds to complete projects already started, and the wheels of restructuring and consolidating the property market grind slowly and painfully on.
Add to this high youth unemployment, wary consumers, an ever more controlling Party, decreasing exports and manufacturing as the rest of the world slows down, and international trade becomes more fragmented and distorted by the bitter geopolitical winds blowing around the globe at the moment, it is a reasonable conclusion to make that a stimulus – monetary or fiscal – is necessary to keep economic growth moving at a pace that keeps people happy.
This is understandable but misses the political element of Party control. The sudden end of lockdown – a surprise to me – came after widespread protests that added censorship and a lack of human rights to the grievances of a people tired of being locked in and subject to a capricious and unpredictable anti-COVID regime. The legitimacy of the Party was at stake, and although there was a post lockdown consumer boom, the decision to end lockdown was not about boosting the economy, it was made because the Party was losing control of the people.
The primary instinct of the Party and all that flows from it is to micro-manage every part of the economy and indeed daily life, and my feeling is that the huge stimuli of the past are over, simply because they unleash forces beyond the Party’s control.
Back in my world of shipping, there are some owners – shipowners I respect for their wise and opportune investment strategies – significantly active in both the newbuilding and secondhand dry bulk market. They are putting their money where their mouths are in the expectation – so I hear, second hand admittedly – that China will indeed fly. Or is that just the story they are giving out to divert attention away from other motives? Who knows?
But what do I really know anyway? I understand the rules of football and have occasionally played it, but I am no expert; it is after all a small part of my life. Other things – rightly so – take up much more of my time. I read a lot about China, past and present, but I have never lived there, I can’t read or speak Mandarin, and most of my resources are second or third hand. But of course that doesn’t stop me from having an opinion as the health of China’s economy and its place in the world will have far more significant effects on my business, and my life, than Liverpool Football Club will ever do.
My instinct is that China will still loom large in shipping, as large as it does in the real world. But its effects on the dry bulk shipping market will be incremental and sentiment driven rather than fundamental, until of course incremental demand growth catches up with fleet supply and sentiment goes through the roof. I can buy into that theory quite easily, just as I can buy into the theory that two or three new players – wisely bought – are enough for Liverpool to win the Premier League next season. What finally will happen – in shipping and in the Premier League – is not just down to what China or Liverpool Football Club does, but what all the other countries, teams and players do as well. That is a very sobering thought for those investing in, betting on or even thinking about the future. My support however – for Liverpool and for shipping – remains solid.
Simon Ward